The Verge of "Overheating" Labor Market in Pictures

Mish

Economist Mark Zandi fears the tight jobs market may "overheat". In the Beige Book, the word "tight" came up 31 times.

Ahead of the last jobs report, Mark Zandi, chief economist of Moody’s Analytics, offered this amusing comment as noted by ADP: “The job market ended the year strongly. Robust Christmas sales prompted retailers and delivery services to add to their payrolls. The tight labor market will get even tighter, raising the specter that it will overheat.

For further discussion, please see December Jobs Up 148K Following ADP 250K "Overheating" Estimate

Turning the spotlight on the Beige Book Drivel I went back to the report and counted 31 instance of the word tight.

Here is a representative sample "Most Districts cited on-going labor market tightness and challenges finding qualified workers across skills and sectors, which, in some instances, was described as constraining growth."

Tight Labor Market Theory

The "tight" labor theory concern is that employees will job hop, demanding higher and higher wages, which in turn will push up inflation forcing the Fed to hike rates more than it wants to.

Unemployment Rate

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​The principle basis behind the tight labor theory is the falling unemployment rate.

The unemployment rate is so distorted that one might wonder why anyone puts any credence into it at all.

Then again, Janet Yellen also believes in the Phillips Curve despite the fact that a Fed Study Shows Phillips Curve Is Useless.

The Phillips Curve theory purports "that inflation and unemployment have a stable and inverse relationship."

Simply put, Phillips Curve proponents believe that falling unemployment leads to higher inflation.

Phillips Curve

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The above chart courtesy of Pater Tenebrarum at the Acting Man blog.

Job Hopping Not

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The Wall Street Journal reports A Tight Labor Market Should Prompt Job-Hopping. It’s Not

The Journal article plotted "separations", I plotted "quits" because they are voluntary.

Hopping is not going according to theory, neither is wage growth.

People are holding on to most jobs compared to pre-recession stats, especially food service jobs.

Hourly Wage Growth

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As a Phillips Curve proponent, Yellen believes that wage growth should be picking up. It isn't.

Jobs vs Employment Discrepancy

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Every month, the BLS posts two sets of numbers. Nonfarm jobs come from the payroll report. Employment and unemployment numbers come from the household survey.

I created the above chart by downloading both sets of numbers then comparing December of 2017 to December in prior years. I used averages for the twelve months.

Starting in 2013 and every year since (5 consecutive years), the change in employment minus the change in nonfarm jobs has been negative.

From 2000 to 2012 (13 years) there were only 4 instances, all nonconsecutive, in which the change in employment minus the change in nonfarm jobs has been negative.

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  • On average, for 2013, the BLS reported 71,000 more jobs per month than employment
  • On average, for 2014, the BLS reported 15,000 more jobs per month than employment
  • On average, for 2015, the BLS reported 15,000 more jobs per month than employment
  • On average, for 2016, the BLS reported 12,000 more jobs per month than employment
  • On average, for 2017, the BLS reported 22,000 more jobs per month than employment

I have pointed out this discrepancy before and I believe it is related to Obamacare and the change in the number of hours one has to work to be considered full-time.

The new Obamacare definition of full-time is 30 hours. The BLS definition is 35 hours. It appears as if employers cut back hours and people started working extra jobs as a result.

The problem with that theory is that it does not show up in BLS multiple jobs stats.

Then again, the BLS takes someone working 20 hours at one job and 15 hours at a second job and counts that as one full-time employee.

The Jobs report says two jobs were created.

I strongly suggest there is failure to correctly count multiple jobholders in the employment report.

I am positive there is a failure to weed out duplicate social security numbers in the establishment survey.

Finally, note that year-over-year changes in both jobs and employment peaked in 2014.

Prime Working Age Underemployment

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At the employment population ratio in January of 2008, an extra 1.1 million prime age persons, age 25-54, would now be working.

At the April 2000 ratio, an extra 3.5 million prime age persons would be working.

Teen Underemployment

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At the employment population ratio in January of 2008, an extra 704,000 teens would now be working.

At the April 2000 ratio, an extra 2.78 million teens would be working.

​First to Go, Most to Drop

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When it comes to letting employees go, or not hiring them in the first place, the 16-19 year olds are the first to go and suffer the biggest employment declines.

Note the possible trend change in 16-19 employment.

Perhaps it's nothing, or perhaps it's related to minimum wage hikes, but perhaps it's an early warning sign.

Overheating Not

​The unemployment numbers may suggest one thing, but the preponderance of data suggests another.

Signs of overheating are simply not present.

Mike "Mish" Shedlock​

Comments (18)
No. 1-18
Mike Mish Shedlock
Mike Mish Shedlock

Editor

If you hand out enough disability, food stamps, and housing subsidies, you can have "full employment" with no one working

Wrldtrst
Wrldtrst

Mish. This was nicely done. Thanks.

El_Tedo
El_Tedo

@Sechel How about welfare reform, entitlement reform & a crackdown on disability fraud. Lets make the safety net a little less comfortable rather than selling of pieces of our culture for a few more basis points in GDP growth?

hmk
hmk

Correct, why work when you can get free stuff. One way to entice more people into the labor markets and also encourage people to match their skill with the best employment opportunity is to provide national healthcare. I know you hate this idea. Many people are working less than they would like in order to retain their obamacare subsidies. Also, there is a labor shortage just ask any business owner. No need for charts and statistics. Yes there is wage inflation, its just not showing up in the bogus govt inflation propaganda numbers. Builders are short laborers and skilled tradesman and look at the increase in new home prices. This is pervasive throughout the business ecosystem not just builders.

KidHorn
KidHorn

My teenage son couldn't find a job last summer. I suspect he didn't really want a job, but I'm not sure.

JonSellers
JonSellers

"Correct, why work when you can get free stuff." I drive through a poor patch of town to get to my boat. Looking at the lifestyle as I pass through, I can certainly see why they would want to work: to get a better lifestyle. I suspect that cultural issues are a part of that problem. If you are raised with low expectations in life, then living on the meager "free stuff" may be adequate. I'm betting these folks have very few skills that they can offer employers also. So just taking away the free stuff doesn't necessarily mean that they can really join the work force in a meaningful way.

WildBull
WildBull

JonSellers: And there lies the problem with welfare. We used to have tens of millions of poor that struggled to get by working crappy subsistence jobs. They knew at least how to show up and make an effort. They encouraged their children to do well in school so that they could do better than their parents. After LBJ's "Great Society" took hold, men left their families by the millions because welfare provided more than they could. Now we have 3 or 4 generations of people that are unaccustomed to work, raised in single parent households. The men in this mess have no responsibility, no positive male example and no example of what it means to work. Then, the Liberals wonder about crime in the inner cities, and why the prisons are full. After 53 years and $44,000,000,000,000 of this, look at the poverty rate between now and then. It is only slightly lower. Wonderful, simply wonderful. Great job.

FlyOver_Country
FlyOver_Country

An interesting podcast https://www.npr.org/player/embed/569461387/569469296
giving three speculations as to why wage growth is not expanding.

  1. Younger workers are taking similar positions as older workers retire. Thus the more expensive, older worker is being replaced by younger, cheaper worker.
  2. Technology
  3. The unemployment stats are wrong and we are not at full-employment.

I can say as anecdotal evidence, #1 has come into play for myself. While I am gainfully employed and not needing to find a new job, I do go out on a regular basis interviewing for new positions. Ya just never know what you might find. Anyway, the last two interviews I was passed over for a younger worker that they could hire at a lower wage. My current employer has done the same. We recently had a large ‘voluntary’ retirement purge. Many of the vacated positions were replaced with 20-30 year-old’s at a 20-50% reduced salary that was paid to the older workers doing the same work.

JonSellers
JonSellers

@WildBull: Agree completely. Which is why I would absolutely support the government putting these people to work, at minimum wage, doing something menial but valuable: picking up litter, cleaning graffiti, whatever. And anyone who doesn't meat minimum standards loses all benefits. And the more children you have, the lower your pay.

JonSellers
JonSellers

@FlyOver_Country : I'll take a fourth option: reducing manufacturing employment leaves more people employed in positions that have little opportunity for productivity gains. Without productivity gains, there is little room for wage growth. And retail work, doctors, lawyers, teachers, policing, etc... are not roles that have the kind of opportunity for productivity increases that you find in manufacturing. In the past, as wages increased in the manufacturing sectors, employers in other sectors were forced to increase wages for fear of losing employees to manufacturing. that competition has gone, and so have the resulting increases in standard of living.\

Realist
Realist

Good points made by many commenters. Statistics on unemployment are a bit fuzzy. Social programs discourage some people from working. Demographics are having a big impact as older, skilled workers retire. Still, the biggest problem , in my opinion, is the mismatch of skills. As repeatedly mentioned by some, there are plenty of skilled jobs available, but not enough skilled labour to fill them. At the same time, there is a large number of people who lack the skills needed to fill those empty jobs. The two obvious solutions to this problem are to train the unskilled labour or to import skilled labour. Training takes a lot of time, effort, and funding. Importing skilled workers is a political issue with its own problems. If neither of these options is pursued, then employers must either automate more or move production elsewhere if they want to expand. I do believe that the US economy is experiencing constraints because of a lack of skilled labour. As far as wages go, there is some wage growth, but I wouldn’t expect a boom in wages due to competitive pressures, both internationally, and from automation. You can only raise wages so far till these alternatives kick in.

FlyOver_Country
FlyOver_Country

Ah, you folks do realize that the majority of welfare recipients ‘DO’ have jobs. Clinton and the Republicans reformed welfare benefits back in 1996 to require recipients to work to receive benefits, only short term befits where given to unemployed. Some of that was rolled back in the Great Recession but many states have reinstituted work requirements.

In 2015, In New Hampshire, 65% of federal welfare assistance went to working families, followed by 64% in Texas. At the other end, 38% of federal aid in West Virginia went to employed families.

Over half the workforce in fast-food service are on welfare of some kind. Hell, a recent study found that 10% of the Amazon workforce in Columbus are on some sort of welfare assistance.

https://blogs.wsj.com/economics/2015/04/13/get-a-job-most-welfare-recipients-already-have-one/

El_Tedo
El_Tedo

@Sechel, I think you're misunderstand what welfare includes. In NY alone, which you reference, Medicaid alone is nearly a third of the state budget. Welfare also includes the Earned Income Credit, which (highly) incentivises - for example - singles mothers to earn no more than $15 to $20 thousand dollars. AT the income level, they not only pay no income taxes, they receive $5 to $7 thousand a year in EIC free cash. PLUS, they'll get free health insurance, food stamps and section 8 housing assistance. If the same woman quits her 25-30 hr a week cashier job at Walmarts and works a full-time job, and perhaps a weekend 2nd job - and earns $50 thousand a year, she loses all of her benefits. And, for one more year, she'll even pay an Obamacare fine. She's financially better off not working. It's called a moral hazard.

whirlaway
whirlaway

Yes, there is no Philips curve.

And there is no Laffer curve either. https://robertdfeinman.com/society/no_laffer.html

Ambrose_Bierce
Ambrose_Bierce

The labor market is a mirage so the term "overheating" is entirely appropriate

Stuki
Stuki

@whirlaway
There’s no Philips curve, no Laffer curve, nor any other empirically derived curve.

Simply because Economics is in no shape nor form, any sort of empirical endeavor. And any attempt at pretending it is, is nothing more than crass charlatanism.

ColoradoBear
ColoradoBear

I work in manufacturing as an engineer and I can tell you there isn't much room for growth there either. We are in a global market competing on productivity. Generally speaking across the sector we have been unable to maintain or increase productivity sufficiently with things as they are. People here, myself included, can only work for so long without any sign of hope. As it is, right now in manufacturing I must work my tail off in order to retain the privilege of working even more for less compensation in the future. I've delivered millions in savings to my employer and developed cutting edge processes for them to remain competitive. My wages have stayed the same and pressure has only increased. So I am leaving the manufacturing industry as a soon as possible and taking my engineering skill to other sectors.

jfs
jfs

Suppose there were a big surplus of skilled labor, but there were cheaper alternivates via outsourcing/automating production. If that were true, companies would still outsource/automate as much of the work as possible. Those selling their labor would have to keep their prices low, which means not much wage growth, which is what we're seeing. So, instead of a shortage, the wage evidence is consistent with the condition of a surplus of skilled labor.


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